If a loan modification is denied, then a mortgage servicer would be required to submit an affidavit in court summarizing all of the efforts to work with a borrower and the basis for denying a modification. In states such as California, where a court order isn't required to foreclose on a property, the mortgage servicer would be required to send that sworn statement directly to the borrower.
The Obama administration in effect banned dual tracking in most cases last summer under its signature foreclosure relief initiative program. But the vast majority of mortgage workouts now occur outside of that initiative through banks' in-house programs.
Lenders completed about 1.24 million of those proprietary modifications in 2010 compared with nearly 513,000 through the government's Home Affordable Modification Program, according to Hope Now, a private-sector group of mortgage servicers, investors, insurers and nonprofit counselors. Banks took back 1.07 million homes from delinquent borrowers last year.
"The biggest problem is that a majority of the modifications today are proprietary," said Peter Swire, a former economic advisor to President Obama specializing in housing issues. "The banks are not on the hook for their non-HAMP modifications."
Homeowners seeking to get their loans modified are confronted with cases of lost paperwork and difficulties communicating with their lenders. Often two separate departments within a bank are pursuing the different tracks, Swire said.
"They have their foreclosure people and then somewhere else they have their modification people," said Swire, now a senior fellow at the Center for American Progress. "They are often in different cities."
Vicki Vidal, associate vice president of public policy for the Mortgage Bankers Assn., said that many times borrowers are unwilling to face reality and ignore overtures from lenders until foreclosure begins.
"Getting that foreclosure notice is a wake-up call to a lot of borrowers," she said. "To some degree that pressure is not necessarily a bad thing."
Most major banks service loans for investors who have set up specific rules governing how and when they must proceed with a foreclosure. If a bank doesn't follow those guidelines, it can lose money.
Furthermore, depending on the jurisdiction, certain states can set up strict timelines for when certain steps in a foreclosure must be taken. If those deadlines aren't met, duplicate costs can result.
"These are state-imposed limitations that we have that can be very real in our world," Vidal said.
Times staff writer E. Scott Reckard contributed to this report.